Why interest rates matter – but food, supply chains and fiscal policy may matter just as much
Rozmarra ki Economy
Inflation is an average. The policy response should depend on what is pushing prices up: excess demand, a supply shortage, or both. In India, where food still dominates the budgets of many households, monetary policy works best when fiscal policy also expands, preserves and moves supply.
Inflation looks simple in a headline and complicated in the kitchen. In August 2026, India’s headline CPI inflation was 4.82%, while food inflation was 5.95%; rural inflation was 5.23% and urban inflation 4.31%. Yet a household buying vegetables, medicines, transport and school services may quite reasonably feel that its own cost of living rose by much more. [1]
That does not make the official number wrong. It reminds us that inflation is an average.
The Consumer Price Index (CPI) follows a large basket of goods and services and assigns each item a weight based broadly on household spending patterns. If a representative basket costing Rs 1,000 last year costs Rs 1,048.20 today, inflation is 4.82%. But nobody literally buys the national average basket. A family spending half its budget on food experiences inflation differently from one spending a quarter on food and more on housing, travel or services.
A better CPI – but whose inflation?
India modernised the CPI in 2026, changing the base year from 2012 to 2024 and basing the weights on the much newer 2023-24 Household Consumption Expenditure Survey (HCES). The all-India weighted basket expanded from 299 to 358 items and price collection was broadened, including online markets. [2]
This was overdue. But the change in food weight deserves attention. Under the old CPI, “food and beverages” had a 45.86% weight. Under the new classification it is 36.75%. MoSPI has clarified that if the old classification system had been retained, changed consumption patterns alone would have brought the share down to 40.10%; the further apparent fall partly reflects the adoption of the international COICOP 2018 classification. [3]
So Indians have not suddenly stopped eating. Some of the difference is statistical reclassification. Even so, the issue remains important. HCES 2023-24 shows food still accounts for 47.04% of average rural consumption expenditure and 39.68% in urban India. In Assam and Bihar, rural food shares exceed 52%. [4]
That means the new CPI may be more representative of the average contemporary consumer while still understating the lived inflation of poorer, food-heavy households. One national CPI is necessary for monetary policy, but it should not be mistaken for everybody’s personal cost-of-living index.
India’s older system actually recognised this diversity more explicitly. For years there were separate CPIs for industrial workers, agricultural labourers, rural labourers and urban non-manual employees. Before the broad rural, urban and combined CPI series began in 2011, the Wholesale Price Index (WPI) was commonly treated as India’s headline inflation measure, despite not covering services and not being a true household cost-of-living index. The move to a broad national CPI was therefore sensible. But there is still a case for publishing more prominent companion inflation measures for different income groups alongside the headline number. [5]
Lower inflation does not mean lower prices
Suppose a basket rises from Rs 1,000 to Rs 1,050. Inflation is 5%. Next year inflation falls to 3%. The basket does not return to Rs 1,030; it rises to about Rs 1,081.50. Prices are still increasing – only more slowly.
So a government can truthfully say “inflation has fallen” while a consumer can equally truthfully say “nothing seems cheaper.” Both can be right.
Why the RBI targets inflation
India operates a flexible inflation-targeting framework. In March 2026, the government renewed the target of 4% CPI inflation, with a tolerance band of 2% to 6%, for April 2026 to March 2031. [6]
The logic is sound. High and unpredictable inflation erodes savings, hurts fixed-income households and makes investment decisions harder. RBI’s main tool is monetary policy: higher interest rates make borrowing costlier, cool demand and help stop temporary price shocks from becoming embedded in wages and other prices.
But India’s inflation is often not purely a demand problem.
Can a Repo Rate produce onions?
If onions become expensive because a crop has failed, a higher Repo Rate will not produce another truckload of onions. If edible-oil prices rise because global prices jump, monetary policy cannot create domestic oilseeds overnight. If tomatoes are being lost between farm and market, a rate hike cannot repair the supply chain.
Monetary policy still matters: it can prevent a food or oil shock from spreading into generalised inflation. But where the original problem is inadequate supply, fiscal and administrative policy may be more important than another 25 basis points on the Repo Rate.
India already uses onion and pulse buffers, open-market releases, imports, trade-policy changes and the Price Stabilisation Fund. In August 2026 the government again began calibrated onion-buffer releases through NAFED and NCCF, using rail and road transport to major consumption centres. Such interventions create temporary “supply pulses.” [7]
They can work, but they have trade-offs. Export restrictions can protect consumers while denying farmers attractive overseas prices. Subsidies can lower the visible price today while shifting part of the cost to the Budget. Broad fiscal giveaways can also stimulate demand and force RBI to tighten more.
The relevant question is therefore not simply, “Is government spending more?” It is, “What is government spending on?”
Produce more – but first stop losing so much
One of India’s least appreciated anti-inflation opportunities lies between the field and the dinner plate.
Using the category totals published by the Ministry of Food Processing Industries from the NABCONS 2022 study, harvest and post-harvest losses across major agricultural categories add up to about 68.9 million tonnes, with monetary losses of roughly Rs 1.50 lakh crore. The commodity-level losses are especially striking for perishables: about 11.61% for tomatoes, 7.26% for onions and 5.96% for potatoes. [8]
This is not merely a waste statistic. It is an inflation statistic. Food saved in the supply chain is economically similar to additional food produced – without using more land, water or fertiliser.
The deeper problem is not simply “build more cold stores.” A 2015 National Centre for Cold Chain Development gap study, still cited in the Ministry of Food Processing Industries’ 2024-25 Annual Report, estimated the need for about 70,000 integrated pack houses against 250 then existing, about 62,000 reefer trucks against fewer than 10,000, and about 9,000 ripening chambers against 800. Bulk cold-storage capacity itself was much closer to the estimated requirement: 32 million tonnes existing versus 35 million tonnes needed. [9]
Those figures are old and need a fresh national assessment. But the structural message remains powerful: a cold store at the end of a broken chain cannot rescue produce that has already deteriorated on the way to it.
The priorities are clear: farm-gate sorting and pre-cooling, commodity-specific storage, refrigerated transport, processing during gluts, and real-time information on production, arrivals, storage capacity and demand.
A subsidy may suppress today’s price. A functioning supply chain can reduce the underlying cost and volatility of food for years.
| Produce more. Lose less. Move it better. |
Where else has this been tried?
International experience supports the case for combining monetary credibility with supply improvement.
After the pandemic, the US Federal Reserve raised its policy rate by 425 basis points in 2022 and another 100 basis points in 2023. US PCE inflation later fell from a 7.2% peak in 2022 to 2.6% by December 2024. But Federal Reserve Chair Jerome Powell explicitly acknowledged that the reversal of pandemic supply disruptions and energy shocks also played a large role. Restrictive monetary policy moderated demand while improving supply helped restore balance. [10]
Türkiye offers the contrary lesson. Its central bank cut the policy rate from 19% to 14% between September and December 2021 despite inflation already around 20%. The lira came under severe pressure, and inflation later surged to around 85% in 2022. The IMF concluded that the very loose policy aggravated vulnerabilities. The lesson is not that interest rates must always rise; it is that monetary credibility cannot be casually abandoned. [11]
My reading
India was right to adopt flexible inflation targeting and give RBI a clear responsibility for price stability. But inflation targeting should not become Repo-rate targeting.
When inflation is broad-based and demand-driven, monetary policy should lead. When onions, tomatoes or pulses are expensive because supply is short, fiscal and supply-side policy should lead, with RBI watching for second-round effects. When an external oil shock strikes, both sides may have to share the burden.
For food inflation in particular, the durable answer lies in productivity, irrigation, storage, logistics, processing, better market integration and predictable trade policy. We should also recognise that one average CPI cannot describe inflation equally well for every household; companion measures could show more clearly how inflation affects lower-income families, rural households and senior citizens.
The most useful policy question comes before the policy prescription: what is causing prices to rise?
| When too much money is chasing too few goods, monetary policy can restrain the money. When there are too few goods, fiscal policy should help produce, preserve and deliver them. The best inflation policy does both. |
Sources and fact-check notes
| [1] MoSPI/PIB, Consumer Price Index on base 2024=100 for August 2026 (14 Sep 2026). | [7] PIB, 26 Aug 2026: calibrated release of onion buffer stocks through NAFED/NCCF, rail and road transport. |
| [2] MoSPI/PIB, revision of CPI base year to 2024=100; basket expanded from 299 to 358 weighted items. | [8] MoFPI/PIB, NABCONS post-harvest loss study (2022): category totals and commodity-level loss rates. The Rs 1.50 lakh crore figure is the sum of published category totals. |
| [3] MoSPI, FAQs on CPI 2024 Series: Food & Beverages weight 36.75%; 40.10% under old classification with new consumption weights. | [9] MoFPI Annual Report 2024-25, citing the 2015 NCCD cold-chain gap assessment; figures are historical, not a current inventory. |
| [4] MoSPI, HCES 2023-24 Final Report: food share 47.04% rural, 39.68% urban; state-wise variation. | [10] US Federal Reserve, Chair Powell (23 Aug 2024): rate increases, inflation decline, and role of improving supply. |
| [5] RBI/MoSPI historical material on occupation-specific CPIs, WPI as headline measure, and broad Rural/Urban/Combined CPI. | [11] IMF, Türkiye 2022 Article IV Staff Report: policy rate cut from 19% to 14% in late 2021 and resulting pressure on the lira. |
| [6] Gazette of India, 25 Mar 2026: inflation target 4%, tolerance band 2%-6%, for 1 Apr 2026-31 Mar 2031. |